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Ageing and the Labor Market in Japan

Problems and Policies

Edited by Koichi Hamada and Hiromi Kato

This book is a concerted attempt by economists to investigate and offer remedies for some of the difficulties associated with an ageing labor market.
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Chapter 5: Immigration vs. Foreign Investment to Ease the Ageing Problems of an Ageing Open Economy

Lakshmi K. Raut


1,2 Lakshmi K. Raut 1. INTRODUCTION In this chapter I formulate an overlapping generations model of the world economy with two regions that vary in ageing pattern: one region consists of Japan and other OECD countries with high life expectancy, low fertility rate and high labor productivity, and the other region consists of the developing countries with low life expectancy, high fertility rate and low labor productivity. It is often argued that the ageing pattern of Japan and other OECD countries would have led to dynamic inefficiency or capital overaccumulation in the absence of their pay-as-you-go social security systems. The ageing in the OECD countries also led to the insolvency of their public pension systems. Calibrating the above model, I examine these issues and also the policy issue of when to invest capital from OECD countries in developing countries and when to import labor from developing countries to cope with the ageing problem of OECD countries. I then use crosscountry aggregate data to empirically examine why not much capital flows from OECD countries into less developed countries, and draw policy conclusions. In the past century the world has witnessed an unprecedented pattern of demographic transitions. Japan and other OECD countries have achieved very high life expectancies and very low total fertility rates. For instance, the life expectancy at birth in Japan increased from 64 years in the 1950s to 83 years in the late 1990s, and the total fertility rate dropped from 2.75 in the 1950s to 1.43...

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